Crushed with debt? Have no bank balance to pay back your dues and debts? Considering bankruptcy? Take some time and think hard before you do. Declaring bankruptcy is a huge step, often considered as the end of the road/the last resort for debtors burdened with financial debt that they can’t afford to pay off.
What is Bankruptcy?
Bankruptcy is basically a form of insolvency. It is the only legal way to get rid of your financial setbacks through court involvement. The process of filing and declaring bankruptcy is easier said than done. It is a stressful, lengthy and a complex process; therefore it must be performed carefully with patience and professional assistance. It helps discharge most of your unsecured debts like credit cards. However, it is important to understand that its impact on your credit report and score can be massive. It can drop your credit score by almost 200 points.
Reasons to File Bankruptcy
Debtors often file for bankruptcy because of the following reasons:
- It gives them a fresh start in life financially
- Helps discharge debts fast
- Get debt relief
- Overburdened with debt
- They have no other option than to declare bankruptcy
Understanding the Bankruptcy Filing Process
When you file for bankruptcy, first, you will have to explain to the presiding bankruptcy trustee about your financial situation and how you got into this financial rut. You will be asked to file the entire list of your financial assets and outstanding debts. According to the nature of your assets, it will be divided into 2 different categories: exempt assets and non-exempt assets.
Exempt assets are those assets which cannot be realized for debt payments like your personal items. On the other hand, non-exempt assets are those assets that can be seized and easily sold to repay outstanding debts.
Likewise, debts are also divided into 2 category types. These are secured and unsecured debts. Secured debts comprises of loans where the creditor has security interest in the property given as collateral while unsecured debts are not secured by any type of collateral.
Once you file your complete information and submit it to the court, the court designates you a trustee who makes sure that your secured debt is paid off in a given period and issues you a mandatory, ‘Stay’. This order is imposed on the collection process and lawsuits. In other words, it stops your creditors from pursuing lawsuits against you, threatening you and laying hands on you through property confiscation.
Which Chapter Should You Choose to File?
Bankruptcy can be divided into 2 main types:
- Chapter 7 Bankruptcy
- Chapter 13 Bankruptcy
Let’s take a deeper dive to understand these 2 types so that you can choose a better option for your financial situation:
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also referred to as a straight bankruptcy, liquidates your assets to pay off your debts as much as possible. Though you are allowed to keep exempted assets but other assets are liquidated, and the cash is distributed to creditors so that unsecured debts are discharged off. Within 4 months time, you, the debtor, will receive a notice of discharge. However, the Chapter 7 bankruptcy stays on your credit report for 10 years.
Chapter 7 bankruptcy is the right choice if your income is below the state’s median income. Generally, this option is chosen by individuals with low income, few assets and outstanding debts.
Chapter 13 Bankruptcy
Under Chapter 13 bankruptcy, you, the debtor, has to repay debts over a specified period of 3 to 5 years through a logical repayment plan where the designated trustee collects the payments from the debtor and transfers them to the creditors. Chapter 13 bankruptcy allows you to keep your property, preventing you from foreclosure.
In comparison to Chapter 7 bankruptcy, Chapter 13 bankruptcy appears on your credit report for 7 years and takes about 5 years to complete the case. This means it will stay on your credit report for2 more years after you get discharged.
Where bankruptcy may seem to be the key to ending your financial problems and taking a fresh start; bad credit in your name after bankruptcy remains for years. Bankruptcy can make it extremely difficult for you to acquire new loans and credit, and it can be unbelievably challenging to build your credit history from scratch. Therefore, we advise you to consult a professional attorney before filing. An experienced attorney can guide you better and help you evaluate different financial debt relief options and select the best one for your situation.
Debt relief options like debt consolidation and debt settlement are two options that you can consider and opt for instead of filing for bankruptcy. These options can help you consolidate and settle your debt without putting up a white flag. They can also help you regain your financial strength, pay off your debts and experience financial independence once again.
Get in touch with our debt consultant for more information and assistance. We can provide you valuable guidance and assist you with your debt management problems.